Automation strategies can be buttressed by systematic transfer plans and systematic withdrawal plans
As everybody knows, retirement is as inevitable as a new day’s sunrise, or to borrow an analogy from conjugal life, as inescapable as an affair in an open marriage. The best-laid retirement plans for individual investors often go awry for a variety of reasons, and only the luckiest among them can hope to meet the challenges posed by tough market conditions.
Most right-thinking individuals, being well aware of the inevitability of it all, do try to craft one plan or another. However, many of us are often reluctant to do so – they end up doing precious little by way of retirement planning. Their laid-back attitude makes them victims of their idleness.
Today, in this column, we will deal with these reluctant retirees, and more specifically, discuss ways to automate a substantial part of their plans to minimise human intervention.
Let’s assume that our reluctant retiree is just an Average Joe; he has slogged all his adult life, made a few promises to himself (well, he hasn’t been able to keep half of them), saved a bit, invested in whatever he thought was appropriate, and, just like his father taught him, purchased a couple of life insurance policies – the endowment kind, and for most parts, suffered on account of low-yielding assets.
Now, imagine that our man is about to retire. And staring right at him, ooh, look at that cold piercing gaze, are a few bank accounts, mutual funds, insurance policies and the like. There is little to show by way of annuity, or pension plans that one usually needs right after superannuation. That is because he has been too lazy (‘lazy’, mind you, not ‘unaware’ exactly) to do anything more.
And, so, after a lifetime of hard work, the reluctant retiree has to take care of his medical bills as well as expenses incurred on food, fuel and sundry other items. There is a dreadful truth called inflation, after all, and at today’s rate, the consumer is spending an average of Rs 7 more on everyday products. Thus, what costs Rs 100 today will, in simple terms, be at least Rs 107 next year.
Automate or perish
The reluctant retiree is often a creature of habit; he is too idle to think out of the box. A SIP in an equity fund, therefore, is rarely renewed, or re-jigged by way of top-ups in any way. Health insurance is not scaled up to take higher medical costs into account. A broking account (remember the demat account that accompanied it?) is hardly used in a meaningful manner.
For such an investor, automation can come as a handy solution. He may set up several SIPs in performance-oriented mutual funds, and then employ triggers. The last device is a great tool for the ordinary individual. A trigger can be instituted, for instance, to stop losses (or even profits). It can be useful in case an investment objective is reached, or when a certain time limit has lapsed, or when a certain valuation has been achieved. A trigger, in other words, can be an investor’s true friend.
Another set of automation can happen with SIP top-ups wherein the investor can allocate higher amounts at pre-set intervals. Such higher allocations can, over the years, bring in great results in the case of market-driven performers. Automation strategies can be buttressed by systematic transfer plans and systematic withdrawal plans. Both STPs and SWPs can be established with multiple funds at one’s disposal.
Such tools must embrace funds that are absolutely in sync with the retiree’s risk profile. There is no point in straining one’s asset allocation strategy to accommodate risky investment products. Such a policy can prove suicidal in difficult market conditions.
Now, having said all this, I strongly advise the ordinary individual to be very vigilant when it comes to risk. Stick to products that you are familiar with, and strictly avoid the ones that seem alien to you.
In the process, if you have to disregard the suggestions of an eager product seller – perhaps he comes to you in the guise of a banker – so be it. The word I am looking for is “caution”, and I suggest that you adhere to it at all times.
The author is Director, Wishlist Capital Advisors